LONDON: Italian government bond yields rose 5-6 basis points across the board on Tuesday after data showed industrial orders in the euro zone's third-largest economy dropped 5.3 percent in December over the same month in 2017.
The data served as the latest reminder of the weak outlook for the Italian economy, ending a rally in prices sparked by expectations for a new round of cheap multi-year loans for banks by the ECB.
"The industrial orders data from Italy has triggered this knee-jerk reaction of BTPs selling off and Bunds rallying," said Mizuho rates strategist Antoine Bouvet.
Indeed, Italy's 10-year bond yield was last up 6 basis points on the day at 1.74 percent, pushing the gap over German 10-year bond yields to 273 bps -- 10 bps wider on the day.
As Italian bonds came under renewed selling pressure, safer German 10-year bond yields headed back towards their lowest levels since October 2016, and were last down two bps points at 0.09 percent.
But Bouvet said the data could not be seen in isolation.
"The German equivalent also declined significantly in December and this will likely trigger some ECB easing and this could have the opposite impact on markets on tightening the Italian spread," he said.
Most other high-grade euro zone bond yields were also 1-2 basis points lower on the day.
Apart from the Italian industrial orders, concerns about potential tariffs on the European auto sector from the United States could also be keeping yields lower and are hurting risk sentiment, analysts said.
European Commission President Jean-Claude Juncker was quoted as saying he does not expect additional import tariffs on European cars for the time being, yet concerns remain high as a confidential Commerce Department report was due to be sent to Donald Trump on Sunday.
The report is widely expected to clear the way for the US president to threaten tariffs on imported autos and auto parts by designating the imports a national security threat.
FRANCE FLIES
Meanwhile, France and Cyprus launched syndicated bond sales at a time when demand for euro zone government bonds appears insatiable.
France had garnered over 33.5 billion euros of demand for a 30-year bond sale, a lead manager told Reuters, and is expected to price the May 2050 issue later on Tuesday.
"There is a lot of demand across the board: we saw Italy's 30-year get 41 billion euro of orders, and the French spread is quite wide after the 'yellow vest' protests," DZ Bank strategist Daniel Lenz said, referring to the protests in France against President Emmanuel Macron's policies.
Meanwhile, Cyprus had generated more than 6 billion euros of interest for a 15-year bond sale and is also set to price its deal on Tuesday, International Financing Review reported.
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